EDITORIAL: Is the GDP forecast too rosy?

The Directorate-General of Budget, Accounting and Statistics (DGBAS) reported on Friday that Taiwan’s GDP expanded by 6.19 percent in the first quarter from a year ago. This is higher than the 5.01 growth forecast made in February and better than many economists’ expectations.

The DGBAS attributed the strong first-quarter economic expansion to the nation’s recovering domestic demand and robust exports. The increase in domestic demand is especially encouraging, suggesting that Taiwanese consumers have finally been willing to spend more money amid a recovery in the labor market. It also indicates the increased purchases made by large inflows of Chinese tourists.

Not surprisingly, the DGBAS on Friday also raised its full-year economic growth forecast to 5.04 percent, from the 4.92 percent forecast made in February. The forecast for the nation’s exports this year was an increase of 14.11 percent to a record US$313.3 billion from last year, while imports would likely rise 12.87 percent to US$283.6 billion. Private consumption is likely to grow 3.94 percent this year, up from the 3.85 percent rise in the February forecast, according to the DGBAS.

Importantly, the DGBAS predicted Taiwan’s per capita GDP would increase to US$20,848 this year, a 12 percent increase from US$18,603 last year.

The DGBAS’ latest figure showed the government was optimistic about the nation’s economic growth this year. Its latest growth forecast was the second-highest among a spate of forecasts made by domestic research institutes, with the Taiwan Institute of Economic Research’s 5.72 percent forecast last week the most optimistic to date.

But is the government being just a little too optimistic? First of all, there are uncertainties arising from the government’s plan to impose a luxury tax and its potential impact on GDP, as well as the ongoing supply chain disruptions following the massive earthquake and tsunami that struck Japan on March 11.

Second, the DGBAS’ upward adjustment in its GDP growth forecast was based on stronger-than-expected first-quarter data. However, an important question is whether both domestic demand and exports will sustain their robust growth in the following quarters. Will we see other contributors to GDP growth, such as government consumption and business investment, in the coming quarters?

There is little doubt that the first-quarter economic data were impressive, but what the government should pay attention to now — as it highlighted in the GDP report — are the rising food and fuel prices that could drive up Taiwan’s inflationary pressure.

Apparently, that was why some other research institutes recently revised downward their growth forecasts for Taiwan this year, citing concerns over rising oil and commodity prices following the political unrest in the Middle East and North Africa.

According to the DGBAS’ estimate, the nation’s consumer price index is likely to grow 2.18 percent this year. That was up from the 2 percent the DGBAS predicted in February and compared with a 0.96 percent increase last year.

Therefore, despite the Cabinet’s plan to give a 3 percent pay raise to government employees and its call for businesses to follow suit, rising inflationary pressure is likely to erode household income, keep a lid on private consumption, dent corporate profit margins and put the brakes on the nation’s economic growth. The government will find its efforts to contain cost-push inflation have a limited effect if fuel and commodity prices continue their upward trend.